Will Europe Blow It?

Alexander Flach is not the type of guy who fears competition. For almost a half century, his family-owned Afri-Cola Bluch Corp., based in the West German industrial city of Cologne, has battled such giants as Coca-Cola and Pepsico in Europe. In its lifetime, more than 15 other small European soft-drink companies have disappeared, but Afri-Cola has managed to survive by building a small, profitable following among the continent's consumers.

Given this background, Flach is not frightened by the impending unification of the European community market in 1992. Indeed, like many other European entrepreneurs, Flach generally regards 1992 as an opportunity to expand his business. "I have no fears about open markets," says Flach, whose sales last year topped $100 million.

Yet behind his self-confident demeanor, Flach is worried -- not about the competition, but about the anti-entrepreneurial attitudes of the increasingly powerful European Community bureaucracy in Brussels. Under the influence of these so-called Eurocrats, Flach does fear Europe's entry into the brave new world of a single market could be strangled by red tape, unnecessary regulation, and enforced centralization.

To a large extent, Flach sees it as a political problem. As power for regulation shifts from national governments to the Eurocrats in Brussels, smaller businesses find it increasingly difficult to make their case. Inside the European bureaucracy, the voices heard tend to be those of large groups -- such as organized labor or multinational giants -- not smaller companies like Afri-Cola, which may be Europe's best hope to regain its competitive spirit.

"I'm not afraid of Coke or the big pharmaceutical companies; we've fought those people for 40 years," Flach says. "But politics, particularly dealing with Brussels, is very alien, expensive, and a waste of time. The big companies have their representatives there all the time. I can't keep a staff of 20 in Brussels. I have to worry about running my company and selling my product."

Flach has already had a sampling of the Eurocrats' distaste for smaller companies. Recent regulations enforcing strict standards for the listing of soft-drink contents on bottles, for instance, weighed heavily on Afri-Cola's licensed bottlers, many of which are small, regional breweries. Yet when Flach and his bottlers tried to lobby the commission in Brussels, he couldn't even get an appointment.

Gaining access to the 12,000-member European Commission is only part of the problem the continent's small and midsize companies face. More disturbing is a mind-set -- common among Brussels's bureaucrats -- that what Europe needs is larger, more centralized companies.

This larger-is-better attitude represents a fallback from the trends of the mid-1980s when Europeans -- led by the example of Prime Minister Margaret Thatcher's Britain -- embraced the entrepreneurial revolution. Even ostensibly Socialist governments, like France's, spoke enthusiastically about promoting growth companies.

But now, notes FranÃ§ois Roche, editor in chief of Ã Pour Affaires Ã‰conomiques, a French business monthly, the mood has shifted dramatically. "Entrepreneurship was all the vogue for a while, but that has changed," Roche believes. "Now, the talk is much more focused on larger companies, centralization in preparation for 1992. There is much less concentration on the role of individual entrepreneurs."

This trend is pronounced in countries like Roche's France, where many owners of small companies are now in their fifties and sixties. These companies are seen as vulnerable to international competition, since many of them will have changed hands between 1987 and 1990.

"Smaller companies in Europe will be disappearing and become integrated into larger firms," predicts Philippe Moisand, who monitors 1992-related activities as a senior tax partner at Price Waterhouse's Paris office. "Concentration seems almost certain to rise."

Europe may end up taking the same route U.S. business did in the 1960s and early 1970s, when large scale represented the inevitable wave of the future. Only later did it become clear that many of these giants, such as Colgate and ITT, had become largely dysfunctional, forcing them to spin off many of their acquisitions.

Will the Europeans learn from our own unfortunate experience? The prospects are not good. The centralization mentality among the Eurocrats in Brussels may be so overwhelming that the commission will be tempted to accelerate corporate consolidations beyond the logic of market forces.

This concern is particularly marked in West Germany, which boasts a strong midsize-company sector. "We fear that the commission will use its power to establish huge European enterprises -- even if it means reduced competition," notes RÃ¼diger Thiele, a top economic adviser on European affairs to German chancellor Helmut Kohl. "There is a powerful tendency in this direction within the commission and every country. This is the great idea in Europe now."

Thiele expects that mergers and acquisitions will be the key issue upon which the validity of this "great idea" will be tested. Many key commission members favor policies that would facilitate megamergers that up to now might have been blocked by individual member states. Rather than worrying that mergers might hinder competition within Europe, some commissioners and member states favor consolidation for what Thiele calls "political reasons," such as fending off U.S. or Japanese companies or promoting growth in poorer European regions such as Spain, Portugal, or Greece.

To Manfred Kotter, who runs a specialty metals company in the German city of Mainz, this urge to consolidate poses serious long-term problems. For years Eugen Kotter, founded by his father, has supplied specialty products for West Germany's powerful electronics, aerospace, and chemical giants. Like Alexander Flach, Kotter is no stranger to severe competition from other countries and favors ushering in a unified European market.

What concerns Kotter is the form the new Europe will take and whether it will be shaped only in the interests of huge enterprises. He cites Brussels's enthusiasm for the giant Airbus Industrie consortium, a joint venture of several European aerospace concerns that has survived only by dint of multibillion-dollar subsidies from various countries. Or recent mergers such as the joining of Daimler-Benz and Messerschmitt-Bolkow-Blohm, which has created an industrial group on the scale of the cartels that dominated prewar Germany.

Creation and support for these massive enterprises, Kotter believes, will put tremendous pressure on smaller businesses that have traditionally supplied larger companies with highly specialized, high-quality products. By cutting down the number of key potential customers, the remaining giants could exercise excessive influence over companies like Kotter, which last year had sales of slightly less than $3 million.

"It's a great problem when the giants come together," Manfred Kotter says. "We are a small company, but we need the big companies. If there are few customers, then we can't get the right price. The large companies can dictate to us. If these companies get too big, there really won't be a chance for a free market."

If the consolidation mentality takes stronger hold, the future for such companies could be bleak indeed. Some may decline into semicaptive suppliers or even be absorbed by expanding Eurogiants. In the process the old continent -- on the brink of its greatest opportunity in decades -- could end up jettisoning perhaps its last chance to develop a strong, competitive entrepreneurial economy like Japan's or America's.

"They say we are building a great market and economy," says Kotter. "But so far it looks like we're doing it on the maps, not in our minds. We seem to be forgetting the role of competition in making this happen. A common market cannot be competitive if industries are dominated by two or three companies and by the bureaucrats. I wonder if we are capable of learning from the history of the past 40 years."